China’s Shanghai Composite Index Rises Most Since 2012

Trading volume in Chinese stock markets rose to a record on Wednesday.

The Shanghai Composite Index climbed to 3.6 percent this week and 31.4 percent this year. The 0.06 percent rise in the market on Wednesday marked the 9th gain in 10 sessions.

The value of shares traded increased to 529.4 billion yuan ($86.1 billion). In comparison, trading on the NYSE was $25.4 billion yesterday. The Shanghai Composite index gained 14 percent over the last month, surpassing all 92 of the world’s benchmark equity indexes by six percentage points.

The efforts made by the Central Bank to boost economic growth in the country, as well as lower borrowing costs, are reviving the confidence in the $4.5 trillion stock market after the index lost greater value compared to any benchmark gauge in the last 5 years.

The WSJ reports that the currently rally is driven by liquidity, and the risk is that it may fall fast as well. The biggest worry is the amount of Chinese investors borrowing money to finance leveraged bets in stocks, but if stocks fall, those investors would incur heavy losses.

Retail investors are showing a renewed interest; they account for 80 percent of the stock-trading volume. However, the speed of these gains is incompatible with the slowdown in the economic growth of the country; the rally lacks a foundation of the economic fundamentals, and the surge in trading margin could indicate near-term risks.

Interest rates were cut down by China’s central bank on 21st November, which stepped up support for the economy as it confronts bad debt and economic slowdown. The central bank is ready to loosen policy, but the investors appear to be betting on more stock gains. This sudden enthusiasm has turned China’s stocks into word-beaters, and the Shanghai Composite Index is now up by 30 percent since the start of the year.

Overall, the value of China’s stock market has increased 8.9 percent since the cut in interest rates for the first time since 2012, and it overtakes Japan as the second largest market around the world after the United States.

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Posted by Fred Wilder
on Dec 6 2014. Filed under Finance.
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